The Securities and Exchange Board of India (SEBI) has proposed a wide-ranging overhaul of regulations governing Alternative Investment Funds (AIFs), including a revised investor consent framework and the replacement of the term “associate” with “related party” across the regulatory regime.
The markets regulator has proposed a more standardised approach to obtaining investor approvals for AIF-related activities. The move seeks to replace the existing framework, under which consent requirements vary across different provisions.
Investor approval
Under the proposal, most material decisions would require the approval of at least 75 per cent of investors by value. SEBI has also suggested changes to the methods through which investor consent may be obtained, with the objective of providing greater flexibility while safeguarding investor interests.
A key proposal relates to transactions involving entities linked to the fund manager or sponsor. AIFs would be required to obtain investor approval before investing in or entering into transactions with “related parties” of the manager or sponsor, replacing the current requirement that applies to “associates”.
Any such investment or transaction with a related party would require the consent of 75 per cent of investors by value. The proposed shift would align the AIF regulations with the provisions of the Companies Act, 2013.
“The intent of these provisions is to ensure that transactions involving heightened conflict potential are undertaken with appropriate transparency and investor awareness, without unduly constraining legitimate commercial activity,” SEBI said, inviting public comments by July 21.
The existing definition of “associate” is relatively narrow and may not capture certain situations where conflicts of interest could arise.
These could include investments in companies where a director also serves on the board of the AIF manager, where a controlling stake is held by an immediate relative of the manager, or where a major shareholder in the investee company also holds a majority stake in the AIF.
Fund norms
The proposed changes would also apply to specific fund categories. Angel funds and special situation funds would be prohibited from investing in related parties of their managers or sponsors, replacing the current restrictions that apply to associates.
In addition, SEBI has proposed enhanced disclosure norms, including mandatory reporting of fees charged by related parties and disclosures relating to investments in such entities in offering documents.